Online retail vs the High Street

The High Street is under assault from online shopping, low-cost supermarkets and much else. Is it tough enough to see off the latest challenges?


Siân O'Sullivan

Siân O'Sullivan

Portfolio Director

Retailers are in crisis. The High Street – as we once knew it – is under assault from transformative trends in online shopping, the emergence of low-cost supermarkets and much else.

That is what the headlines tell us. But is the reality so straightforward?

It is true that the growth of Amazon and other online distributors has meant that consumers are spending less money in supermarkets and on the High Street. And one of the upshots of this trend is that prices of staple goods are forced down.

Analysis across hundreds of items shows that in the US, Amazon’s grocery prices are lower than’s in about 40% of cases. For most other items, the prices are the same.

In Britain, Amazon’s pricing beats Tesco and Sainsbury’s in approximately 80% of cases.

A similar picture emerges with Boots and Pets at Home. Amazon’s pricing algorithm is programmed to match a competitor – even if it takes a loss on the item. This is why very few goods are rarely more expensive. But the shift to online channels is overstated. In many segments it remains a relatively small part of the overall market.

For example, only 1.5% of US food sales are online, a proportion which is expected to increase to around 5% in the next two years. The rate of growth in online shopping will depend on how fast retailers invest: it is widely accepted that the acquisition of Whole Foods by Amazon was a big step in accelerating the pace of transition.

Many argue that online shopping means there is greater pricing transparency, although General Mills, the US-based manufacturer and marketer of branded foods, has argued that there is more visible price comparison on the shelf, where items are positioned side-by-side.

General Mills’s view is that the online consumer does not bother scrolling past the first couple of pages: the big brands command the space at the top of the list.

This issue of pricing is critical, as these companies have competitive margin targets and need to hold on to their pricing power.

The rise of ‘craft’ brands

The switch to online is not the only transformative trend. People are increasingly demanding craft products, and these brands are finding it far easier to grow their markets thanks to the use of the internet and social media. This has led to fragmentation and circumstances where small companies are capturing almost all of the market growth at the expense of established companies. 

Possibly the best example of growth in a small brand is the UK’s soft drinks manufacturer Fever-Tree. It has grown sales by 750% since 2013 and is now a £3 billion company. In the US, George Clooney and Rande Gerber’s Casamigos Tequila – which they sold to Diageo for US$1 billion only four years after they came up with the idea – is another example.

But large, established companies have much on their side. They have the advantage of distribution networks, large balance sheets, generous advertising budgets and a lower cost base than their craft competitors. Diageo has already doubled volumes of its Casamigos brand – would that have been achieved were it a lone company? Estée Lauder has a long history of using acquisitions to keep up with changing trends. They acquired Jo Malone in 1999, collaborated with Tom Ford in 2005, and bought three make-up brands in 2016 geared toward the millennial generation, and are set to benefit from the proliferation of make-up tutorials on social media.

The threat from discounters

Another concern is the rise of price-cutting providers such as Aldi and Lidl, and the threat they bring of increased “private label” products that compete with established names. In Europe this is more of a threat because the discounters have a higher share of the retail market than in the US. Manufacturers most at threat from private label expansion – which include foods and personal care brands – are actively protecting themselves. Established brands have long-standing relationships with retailers and both parties have a common interest.

In the UK food sector, for example, food producers such as Cranswick and Hilton are working with supermarkets in order to protect their margins. The supermarkets want deeper relationships with their strategic partners, and they want to assist suppliers to reduce costs which can then be passed to customers. Agreeing longer-term contracts with food producers is one example of this more collaborative approach.

It is not only about managing down costs. Established firms are also responding to disruption by acquiring relevant businesses. Unilever has undertaken around 18 deals since 2015, spending €8 billion in the process.

Key for any shareholder is the need to identify companies with strong market positons and a proven ability to invest, adapt and maintain growth trajectories – plus, of course, valuation.

Most of these companies have been in business for over 50 years. Today’s disruptive trends are certainly not the first major challenges they have faced. And they will not be the last.

Staple brands: what next?

Over the last year, share prices in consumer staples sectors – companies such as Unilever, Nestlé and Reckitt Benckiser – have fallen behind the wider market. In part, the traditional “bond proxy” status of the sector – where they are viewed as dependable providers of income – has come to bite as investors worry about inflation and further rate rises. This has caused money to move to other sectors.

Disruption, as outlined in the main article, is also sparking investor concern.

But is this underperformance justified?

This depends partly on longer-term interest rates. We expect any rate rises to be slow and gradual.

Looking beyond transitory factors, there is evidence of revenue growth and strong underlying earnings. So far this year, more than half of European staples companies beat expectations for organic revenue growth, and forecasts continue to improve.


Siân O'Sullivan

Siân O'Sullivan

Portfolio Director

Siân joined in 2014. She is a Portfolio Manager responsible for managing private client portfolios both on and offshore. She graduated from the University of Bristol with a 1st class BSc (Hons) in Economics and Politics and is a CFA charterholder.

This article is issued by Cazenove Capital which is part of the Schroder Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

Contact Cazenove Capital

To discuss your DFM requirements, or to find out more about our services and how we can help you, please contact:

Simon Cooper

Simon Cooper

Head of DFM Relationship Management